The US tax system is continuously growing as the government is constantly adding new rules to close loopholes and increase tax revenues. Yet, there remain many strategies people can take advantage of to reduce their individual tax burden. Individual taxes have become easier to file with the prevalence of income tax software. These programs make filing taxes a simple step-by-step process. The software is even designed to ask you questions to assist in utilizing the tax credits you may be eligible to claim.
However, you should be aware of basic tax regulations and credits which may apply to your personal situation. This could help you save thousands of dollars over the years. An excellent resource for individuals to gain tax knowledge is the Internal Revenue Service (IRS) website. They have a section dedicated for individual credits which may be a good starting point. Credits are a simple way to reduce your yearly income tax.
For instance, if your income tax is $750 and you are eligible for a $75 tax credit, your tax payable is immediately reduced to $675. That’s an extra $75 you can spend on yourself or your family. The major tax credits are usually available year-after-year, but others credits are not renewed or new ones are created, so it’s a good idea to visit the IRS individual tax credit webpage once a year to stay updated. Here are a few other tips to help reduce your personal income taxes:
The Earned Income Tax Credit is available to single individuals or married couples. The tax relief increases quite rapidly if you have children. A couple with three children can claim $6,242 in tax credit for tax year 2015 as long as they are below a specified maximum income threshold. Note that at the moment, this credit is slated to expire for married couples on December 31, 2017.
We all wish we could increase our tax credits to reduce the amount of taxes we have to pay, but unfortunately personal circumstances limit the various credits we may claim. A credit most people believe they are long past its eligibility is an education credit. However, the Lifetime Learning Credit is geared towards adults who are still studying. You can claim up to $2,000 or 20% of a maximum $10,000 on post-high school education expenses as long as the courses and training are meant to improve your job skills.
The typical educational tax credit is the American Opportunity Tax Credit, which is available throughout a student’s college years. The first $2,000 a student pays for qualifying college expenses are 100% applicable towards the tax credit and another 25% of expenses are thereafter eligible up to a maximum tax credit of $2,500 per student.
If you are employed and use your car for work related travel, you may be eligible for a tax deduction. The travel has to be beyond the daily commute to your workplace. For instance, if you take your car daily to the office, this would not qualify as deductible expense on your taxes. However, if you need your car to travel to offices of your company’s clients or satellite offices and your vehicle expenses are not reimbursed by your employer, you may deduct mileage expenses in your personal income tax return.
Contributions to your retirement savings accounts serve a couple of purposes. The immediate benefit is your contributions apply directly against your taxable income to reduce it. The higher your retirement contribution (subject to some limitations), the lower you income tax will be. For instance, a person with $43,000 in taxable income and a retirement savings contribution of $2,500 will only be taxed on $40,500. You will be taxed on your retirement contributions at the time you withdraw the money from your account, but if you do this after your retirement, when your income from employment is nil, your tax burden should not increase substantially.
The other benefit is an important one, even though you will only benefit from it in the long run. The investment income generated through your retirement savings account is not taxable when you earn the income. Rather, they are taxed at the time you withdraw the income from your savings account. As mentioned above, this should not increase your taxes considerably if the withdrawal occurs after retirement.
Similar to investments in a retirement savings account, you can benefit from deferred taxes by contributing to a health savings account if your medical plan has a high deductible. The contributions which you do not apply towards medical expenses can remain in the account and grow without incurring any tax liability until withdrawn from the account.
Don’t rely only on the income tax preparation software or on your tax preparer or for tax advice as he or she may not know about every aspect of your personal or family situation. Do your own research and stay up-to-date on tax changes yearly to claim every possible tax break strategy which applies to you.
BHATIA & CO, INC, CPAs